I have a two person partnership that is liquidating in 2009. Partner 2 received an allocation of loss in 2003 of $8k which resulted in a negative capital balance of $8k since he didn't contribute anything. Partner 2 has had no activity since that time - all allocations have gone to Partner 1.
How do I treat the negative basis on this final tax return? I've read to allocate income to this partner to bring his capital to zero. There is no income this year - only loss. Do I create a greater loss by creating income for Partner 2 and alternatively greater loss for Partner 1 bringing both their capital to zero?
asked 01 Jan '10, 02:02
It appears that the 2003 loss allocation lacked "substantial economic effect" unless Partner 2 had an unconditional obligation to restore the deficit (Sec 704b) or was responsible for debt in accordance with Sec 752.
What does the partnership agreement provide with regard to restoration of capital accounts?
Since 2003 is a closed year, "gross income", if available, can be allocated to Partner 2, but no further losses can be allocated. It appears Partner 1 has a positve capital account and will absorb the loss on liquidation, with a remaining balance of positve $8k, and, further, indicates that Partner 2 owes partner 1 $8k, or Partner 1 has an additional loss, while Partner 2 has a gain. Also, this is why it appears that the $8k loss allocation lacked substantial economic effect.
answered 01 Jan '10, 16:37
I agree with Brent here. You should look to the partnership agreement for guidance on how to deal with this. Most partnership agreements (ALL of the partnerhips agreements I've seen!) include a provision requiring partners with negative capital accounts to make sufficient contributions to ZERO them out on liquidation. Good luck selling this to Partner 2 - I'm sure he can hardly wait to put $8K into a business that is defunct.
On the up side, since he had no basis in the partnership when it passed a loss on to him - and which we should assume was NOT deducted on his personal return because he had no basis - that loss would be suspended until a year in which he does have basis. His contribution then to get him to ZERO SHOULD qualify as basis and he should get to deduct that contribution.
BUT, partnership and pass-through taxation is without question the MOST complicated, complex and convoluted part of the tax code. Consultation with a professional versed in partnership and pass through taxation is CRUCIAL to make sure you treat this correctly.
Most EAs & (tax oriented)CPAs should be able to tell you exactly where you are and what you can and should do, but they will likely want to read the partnership agreement and review Partner 2's tax returns - Expect to pay a fee for this, especially at THIS time of year.
answered 05 Jan '10, 01:59